Middle class will struggle to buy a home this year

America’s shrinking ‘home-affordability belt’

We’ve had the Rust Belt and the Bible Belt. Behold — the Home-Affordability Belt. There’s a growing divide between home affordability in Middle America and coastal cities, experts say, and mortgages in the most expensive metro areas are likely to be even further out of reach for the average house hunter this year.

The affordability of homes cuts a clean line through the Midwest, while the East and West coasts are the least affordable, according to a survey by HSH.com, a Riverdale, N.J.-based mortgage-information company. Residents of these five cities need the lowest annual salary to afford a median-priced home: Cleveland ($29,788), Pittsburgh ($30,177), St. Louis ($31,275), Cincinnati ($31,850) and Detroit ($32,250). But you need to earn big bucks in the five least-affordable cities: Boston ($79,820) Los Angeles ($85,964) New York City ($89,788), San Diego ($98,534) and San Francisco ($137,129).

As house prices have risen, only three metro areas out of 27 surveyed saw mortgage rates fall during the first quarter of 2014 compared with the previous quarter, according to HSH.com’s analysis of National Association of Realtors house prices and first-quarter average interest rate for 30-year, fixed-rate mortgages. “The rising tide of home prices has lifted all boats, but to varying degrees,” says Keith Gumbinger, vice president of HSH.com. In fact, there was a 50-50 split between those metro areas where people needed a bigger or smaller salary to qualify for a mortgage in the first quarter versus the fourth quarter.

More than 80% of homes for sale are affordable for median earners in most of the Midwest, a separate study of home affordability by real estate website Trulia found. But the middle class is being priced out of median priced homes in many cities, studies show. Just 1 in 4 homes for sale in New York and Los Angeles and 1 in 7 in San Francisco are within reach of those earning the median household income in those cities. In San Francisco, only 14% of homes are within reach of the median annual household income in that city ($84,129). In Denver, 50% are in reach of median earners ($62,487).

“Affordability has worsened in the last year,” says Daisy Kong, a spokeswoman for Trulia. “Home prices have climbed faster than incomes, and interest rates have risen.” Asking prices for existing houses are up around 9% year-over-year, according to Trulia. In contrast, the real median household income – adjusted for inflation – was flat in March from the previous month and up just 1.3% on the year, according to analysis by Sentier Research, which provides data on income and demographics. In real dollar terms, the median annual income is 7.5% lower (or $4,309) than its January 2008 high.

The gap between wages and house prices in most markets will widen this year, says Lawrence Yun, chief economist with the National Association of Realtors, the trade group for the industry. The Federal Reserve is slowly winding down the quantitative easing program known as QE3, which has funneled trillions of dollars into the economy and provided a shot in the arm for the housing market. “This will help raise interest rates toward the latter part of the year,” he says. In San Francisco, a 1% increase in mortgage payments would mean $500 a month in payments, he says, versus just $100 in Middle America.

Zillow: Nearly 10 million U.S. households remain 'underwater'

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It's been almost six years but are affordable homes still being kept off the market because they are underwater. That's the finding of a recent survey from Internet real estate giant Zillow. Zillow's chief economist Stan Humphries explains the data. Photo: Getty.

Rising rates will hit some home buyers more than others. “A person with a decent, stable job would be able to buy a home within their budget in cities like St. Louis, Indianapolis and Cincinnati,” Yun says. “As long as they have a high credit score, the income requirement should not be a barrier to buying a home.” But the situation will be “more challenging” for those looking for homes in New York, Boston and Washington, D.C. Not only will qualifying for a mortgage become more challenging, but so will coming up with a down payment for a home, he adds. “Coastal regions do favor top-tier earners,” Yun says.

Interactive map: Salary needed to afford a home in these cities

In many cities, high property prices are partly due to the lack of available land for building, plus strict regulations. “Along the California coast and southern Florida, construction is limited, which has helped dry up the supply and, as a result, demand in these areas are high,” Kong says. Similarly, there’s far less new building in places like Honolulu, New York and – in particular – San Francisco, which has strong grass roots organizations preserving neighborhoods and strict construction and zoning regulations. “Without more construction, those unaffordable markets are going to stay unaffordable,” she adds.

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